The contributory factors for widespread between deposit rates and lending rates in the banking institutions in Tanzania

In Tanzania, the issue of wide interest rate spread has recently generated public debate, because despite the improvement of macroeconomic stability and the financial market performance, the gap has not narrowed. In this regard, this study attempted to examine the factors contributing to the wide bank interest spread and its effect on the financial market.In order to address the research objective, the study adopted survey methods. A survey on a number of commercial banks and bank customers was conducted in Dar es Salaam. During the survey, an exploration of the perceptions of respondents on the bank interest spread and the factors associated with it were examined. In addition, the relationship between the bank interest rates spread and the performance of the banking sector was examined. This paper examined the connection of various factors and interest rate spread in Tanzania using three approaches based on qualitative and quantitative as well as correlation analysis. It concluded that, the existence of wide interest rate spread is closely associated with high bank operational costs, opportunity cost of bank reserves, financial taxation. The result also shows that macroeconomic instability, laxity in bank supervision has similar impact and affects investment and banking sector as whole. Thus, it is recommended that commercial banks share facilities for delivering services so as to reduce operating costs and interest rate spread and that Bank of Tanzania should promote vibrant primary and secondary financial markets as well as developing supportive legal and regulatory frameworks.